Study: Confident investors plan better

By Catey Hill

Marcus Garvey once said “if you have no confidence in self, you are twice defeated in the race of life.” Recent research shows that Garvey might have been on to something — at least when it comes to retirement planning.

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Individuals with greater confidence in their financial abilities are more likely to report that they are financially planning for retirement, and they’re more likely to successfully minimize investment fees, according to a study published in the Journal of Behavioral Decision Making this year.

The finding held true even when the researchers controlled for actual financial knowledge. In other words, even when people didn’t have a high level of financial knowledge, if they had a high level of confidence in their financial knowledge they were significantly more likely to have a head start on their retirement planning, and to have minimized their fees.

The study authors theorize that “confidence may be needed to start the possibly overwhelming process of retirement planning or even to make an appointment with a financial planner.” Being more confident might also enable those investors to plow through more of the investment literature and other data available to them, and thus find more ways to cut costs.

To be sure, it’s hard to definitively prove that confidence caused — rather than was just correlated with — these positive outcomes. And the study didn’t look at the participants’ ultimate nest egg amounts, or examine whether their decisions proved to be prudent.

Still the evidence is persuasive that confidence positively impacts your ability to save for retirement. So we asked financial professionals for some advice about the best ways for a relative novice to increase financial confidence. Here’s what they told us.

Write down your goals — and put a dollar amount on them. The first step towards achieving financial confidence is to clarify your goals, says Charles Schwab financial consultant Myhanh Hoskin, a certified financial planner based in Long Beach, Calif. “Make a list of what’s important to you and your family,” she says. Divide up the list of goals into short term (goals to achieve in less than a year), medium term (goals to achieve in one to five years) and long term (goals that will take longer than five years), and then work to put a dollar amount on each, she says, working with the help of a financial adviser if needed.

Line up your assets with your goals. The next move is to see where your current financial status stands in relation to your goals, says Rebecca Hall, an Ameriprise Financial private wealth advisor, based in Reston, Va. (If you’re working with an adviser, this should be one of your very first conversations.) You’ll want to figure out your cash flow (what’s going out and coming in each month) and net worth; do some “protection planning” (ask yourself: “Am I financially prepared for certain worst-case scenarios like job loss or health issues?”); determine whether your investment mix is appropriate to help you reach your goals; do tax planning; and make sure you’re on track for retirement. Revisit these topics at least once a year, to make sure your financial plans remain on track.

Lock in some guaranteed income. As you’re getting closer to retirement, few things can cause a hit to your financial confidence — and thwart retirement dreams — like losing a bunch of money in your 401(k) or IRA when the market swings. That’s why Pete D’Arruda, president of Capital Financial Advisory Group in Cary, NC recommends guaranteed income products like annuities and guaranteed income riders within life insurance contracts. “You can’t outlive this income, so it gives your peace of mind and confidence that you’ll be able to retire with enough money,” he says. Weigh your options carefully, though, as these kinds of products can be pricey.

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About Encore

Encore looks at the changing nature of retirement, from new rules and guidelines for financial security to the shifting identities, needs and priorities of people saving for and living in retirement. Our lead blogger is editor Matthew Heimer, and frequent contributors include editor Amy Hoak, writer Catey Hill, and MarketWatch columnists Elizabeth O’Brien, Robert Powell and Andrea Coombes. Encore also features regular commentary from The Wall Street Journal retirement columnists Glenn Ruffenach and Anne Tergesen and the Director of the Center for Retirement Research at Boston College, Alicia H. Munnell.